Headwinds, tailwinds and renewables

The global energy story could see some positive twists yet

The churn in energy markets resulting from the contraction in Russia’s gas and oil supply is rippling across borders and sectors. Almost all sources of energy have become far more valuable than they used to be in an era of plenty.

According to BloombergNEF’s latest data, energy costs are trending up. Higher interest rates, inflation and currency volatility all make clean energy pricier. That said, it is still beating dirty energy on costs, and that is set to drive growth in the sector in the near term.

“Despite the headwinds, demand for clean power remains strong,” Logan Goldie-Scot, BNEF’s head of clean power wrote in a report, Global clean power tailwinds to trump economic headwinds. “BNEF expects 106 gigawatts of wind capacity to be installed globally in 2022, up from roughly 100 GW last year. An additional 241 GW of solar PV is also installed in BNEF’s mid scenario in 2022, up from 182 GW in 2021. Major tailwinds include ongoing cost competitiveness with fossil fuels despite the rising input costs, resilient policy support for decarbonisation and increasing corporate demand for clean power.”

The numbers bear this out: Renewable energy investment globally was at a record $226 billion in the first half of 2022, according to BNEF data. Solar made up the largest portion (with $120 billion), followed by onshore and offshore wind.

Focusing on the positive developments, the US is back on the decarbonisation road — after the setback on the Build Back Better Bill. The proposed Inflation Reduction Act could provide at least $370 billion to support energy transition technologies, including electric vehicles, batteries, battery materials, nuclear power and hydrogen. The attempt is bold, though the final outcome is uncertain, given that it still needs to be passed in the Senate and the House of Representatives.

Europe is in the process of raising its climate ambition under the “Fit for 55” plan, which aims to drive a 55 per cent reduction in the bloc’s emissions by 2030 relative to 1990 levels, even as it grapples with disruptions in its gas supply. In Asia, India formally took on enhanced climate goals. By 2030, it is aiming for a 45 per cent reduction in the emissions intensity of its gross domestic product (GDP) and a 50 per cent share of non-fossil fuel power generation capacity. China is working towards a goal of net-zero emissions by 2060.

Corporations have been adding their firepower to decarbonisation efforts, increasing expenditure and setting their own net-zero emissions targets. Amazon, for instance, aims to become a net-zero emitter of greenhouse gases by 2040. Nonetheless, its carbon footprint grew 18 per cent in 2021, according to its sustainability report published earlier this week. On the plus side, its carbon intensity fell 1.9 per cent.

However, what a company includes in its footprint and what it excludes from its scope complicates comparisons between firms. In addition to emissions and environment, social and governance metrics are increasingly becoming important for companies, investors and consumers. Various regulators across the globe are framing environmental, social, and governance (ESG) rules to ensure better and standardised disclosures on sustainability. Between March and May, the US Securities and Exchange Commission proposed three rules to enhance ESG information disclosures and accountability.

Close to $750 billion in sustainable debt instruments, including green bonds, green loans, sustainability bonds and social bonds, were issued in the first half of the year. Annual sustainable debt issuance reached a peak of $1.7 trillion last year, but will likely post a lower number this year, unless there is a significant jump in the second half. “There are two factors driving the slowdown. Concern on greenwashing is damping sentiment, and so is the wider macro-economic environment of rising interest rates,” said Kyle Harrison, head of sustainability research at BNEF. 

A net-zero world would also require larger, more ambitious carbon markets. There are currently eight major compliance carbon markets globally. The biggest market by traded value is the European Union Emissions Trading System (usually referred to as the EU ETS). California’s cap-and-trade programme, the largest market by traded value in the Americas, is being redesigned to reach carbon neutrality by 2045. The UK and another US market, the Regional Greenhouse Gas Initiative, are also updating their programmes. The other major markets around the world — New Zealand, South Korea, China and Australia — are also looking to strengthen their impact.

The continuing focus on greening companies, reporting and sustainability could lead to significant changes in global production and consumption patterns.

The writer is the New York-based editor – global policy for BloombergNEF. vgombar@bloomberg.net